* Final investment decision likely delayed for Arrow LNG
* Shell may sell gas to rivals' LNG plants
* Cost blowout still an issue -source
* Decision not to move forward with plant would be prudent -analysts
By Rebekah Kebede and Sonali Paul
PERTH/MELBOURNE, Nov 20 (Reuters) - Royal Dutch Shell may delay a final decision on whether to push ahead with its Arrow liquefied natural gas plant in Australia as it considers feeding its gas into other LNG projects in the area due to rising costs.
The Arrow LNG development, slated to be built in partnership with PetroChina, is one of four projects on Australia's east coast that aim to pump gas from coal seams to export facilities, all of which have faced significant cost increases and development challenges.
"There is no rush for us (to make) a final investment decision, and we'll time this with the local market, and potentially combine with third parties," Shell oil and gas production chief Andrew Brown said, according to the transcript of a briefing the firm held for investors in New York late last week.
Earlier this year, sources said that the cost of the Arrow LNG project in Queensland may have increased to $34-$36 billion from the $24-$26 billion initially touted.
Skill and equipment shortages, community opposition and a stubbornly strong Australian dollar have jacked up construction costs.
"With three projects under construction at Curtis Island (in Queensland), it makes sense to think about the best value solution for Shell and get the timing right," Brown said, adding that permitting, infrastructure and development bottlenecks had added to costs.
Arrow LNG and Royal Dutch Shell were not immediately available for comment.
A source familiar with the situation said the developers are concerned that Arrow LNG's coal seam gas supplies will not be adequate to justify the downstream investment, citing widespread public opposition to coal seam development in Australia.
A final investment decision on the project is likely to be made at the start of 2014, rather than in 2013 as previously planned.
Shell's comments did not surprise industry watchers who have been expecting the Shell-PetroChina joint-venture to eventually shift plans away from building a plant or at the very least postpone Arrow LNG's development.
The move to delay the facility and possibly sell the venture's gas to its rivals may be the most prudent option, experts said.
"It never made sense to have four projects, and it makes even less sense now," Johan Hedstrom, an analyst with Bell Potter Securities, noting that some of the increase in cost has been due to competition for the same resources.
Geoff Barker, a partner with Resource Investment Strategy Consultants in Perth, said Shell's decision to push back the development was rational given the overheated LNG development market in Australia as well as risks that have pushed costs up for other projects.
"Shell could actually be a significant beneficiary of taking a more measured approach," Barker said.
"They do have other investment options globally."
Other Queensland LNG project owners have been scrambling to sell down stakes in their projects to spread risk and reduce their costs, with industry experts speculating that cost pressures may deter the expansion of existing projects.
BG Group sold a 40 percent stake in its Queensland Curtis LNG development earlier this month to China's CNOOC Group for $1.93 billion.
Origin Energy and Conoco Phillips are each looking to sell down 7.5 percent stakes in their Australia Pacific LNG project, to cut their holdings to 30 percent each, having already sold a 25 percent stake to China's Sinopec .
Brown also confirmed that Shell faces a big cost hike and possible start-up delay at Australia's biggest LNG project, Gorgon, operated by Chevron.
"When Shell took FID on Gorgon in 2009, we had assumed a higher budget than then $37 billion described by Chevron, the operator, and a later start-up schedule than the first gas in 2014 that was expected," Brown said.
"Today our cost estimates are higher again than our assumptions at FID, and we remain conservative on the start-up date," he said.